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Friday, June 5, 2020
Home Articles With value gone out the window, liquidity is the key

With value gone out the window, liquidity is the key

HOW much is your house in Cyprus worth? Well, frankly it doesn’t really matter because if you can’t sell it then it’s worth nothing.

Replace the “house” with “collateral” and “you” with “bank” and this little example sums up the situation that many banks find themselves in – holding illiquid assets as collateral.

Are valuers at fault? Well, yes and no. The job of the valuer is to determine the probable transaction price of a property on the day of valuation; not how quickly that can be achieved.

On the other hand, valuers are taking their time in adjusting their valuations to where prices are, mainly due to a lack of comparable transaction evidence.

Lack of transactions means lack of market signals, and thus arbitrary adjustments on the part of valuers or “linking” new valuations to previous ones (in “tech-speak”, autocorrelation).

So how much are valuers off in their valuations? The Property Price Index of Greece’s Central bank shows a decrease in residential property prices of 14% over the past three years.

The Property Price Index of Cyprus’ Central bank shows a decrease in residential property prices of 8.3% over the past two years.

Both indices are based on valuations carried out for collateral purposes. Anecdotal evidence suggests that in both cases the decrease is at least double.

So if valuers aren’t doing their job right, what could they be doing? In some cases the problem lays in not using more advanced methods in carrying out property valuations.

Methods like Discounted Cash Flow (DCF) and the Income Method derive their inputs from markets which are continuing to function, e.g. bond market, deposit rates, etc, although they may not show the “pretty picture” that we all like to see.

For example, if the Cyprus government’s five year bond is currently trading at 11.59% why are shops being valued at an initial yield of 6.0%? This yield implies that either valuers expect capital values or rental values to rapidly increase, or that they don’t want to halve the value of the property compared to what it was two years ago.

So with valuations being uncertain at best, what about the actual worth of the property to its owner (or to the bank which is holding it as collateral)?

Assuming that valuers are doing a fantastic job and that they correctly value two properties at €200,000 each, are those two properties of the same quality as collateral? If one is a field in the middle of nowhere and the other a flat in the city centre then the answer becomes a lot more obvious.

Yet banks tend to treat collateral pretty much the same, regardless of its liquidity (which is something not reflected in the asset’s value in any event).

If you think that liquidity doesn’t really matter, read this:

Last week the most expensive house in Ireland was withdrawn from the market, even after reducing its asking price by 75%. The house was bought in 2005 for €58m and was on the market at €15m.

Question – if you can’t sell a property for even a quarter of its acquisition price then what is it worth to you or to your bank?

About the author

Pavlos Loizou MRICS is the lead consultant at Leaf Research.

Leaf Research is a leading real estate consultancy firm, providing high quality real estate market research, valuation, feasibility studies, financial modelling and strategic consultancy.


  1. @Curmudgeon – You ask about the CPN platform. At present there are some 2,800 subscribers. Looking at their names and email addresses, I would say around half are British.

    There are also many Cypriots and I can also see numerous Eastern European and Russian names and subscribers from China, the Middle East, Ireland, Northern Europe, Switzerland and a few from as far as Australia.

    Quite a cosmopolitan readership.

  2. @Alex – Your second comment at 10.45am

    A Cypriot buying new property is re-circulating old money. Foreign buyers bring new money into the country – that increases the islands wealth.

    Expats have a genuine grievance about Title Deeds. In the UK we have a have a legal framework that protects the buyer against fraud and corruption. Here in Cyprus you have legal framework that protects the corrupt and fraudulent practices of developers.

    I think I right in saying that the CPN platform/forum is mainly English speaking so I doubt if you will find many comments by the Russian/Norwegian/Swedish/Chinese community although you do get the odd input from them. I can assure you when they comment their input is much the same as an British expat.

    If you cannot see or understand why expats are NOT investing in property here, then you are short sighted.

    IF Title Deeds were available on purchase of a new property, they would be selling like hot cakes at today’s prices. The economy would be in a better shape than it is now.

  3. andyp – Point taken but generally I would suggest the majority of Cypriots own title to the land upon which they build their houses. Those, predominantly of the younger generation, who have sold their family land and then buy so called modern apartments/villa’s from developers will certainly suffer from the title deed debacle as you say. I can only conclude that they have ignored their peer’s advice and are prepared to take a chance on what they perceive to be a modern lifestyle. They will learn in time but then it will be too late as their ancestral land has gone and their modern box is a slum crumbling to bits. Sometimes we need harsh lessons to teach us.

  4. Alex – Agree totally with your analysis, comment and perception. Well said.

    My only issue is why do you drive the few metres from your home to the office, I assume it can only be a few metres as you stated you only see 3 cars ignoring a red light on the journey!

    I wonder, have you also noticed that it is only foreigners who acknowledge or thank you for letting them enter the flowing traffic. My compatriots just totally ignore your effort of holding up or slowing down the traffic behind you in order to permit them to join the flow of traffic they have probably been waiting ages to do. Perhaps it is considered a god given right and my parents forgot to tell me. A little tolerance and understanding on the roads would be a good thing I feel, but that might be asking a little too much for now. Perhaps when we finally accept we are a member of the European Union we can consider it.

  5. Alex. I think you will find with the current banking crisis that even the Cypriot population caught up in the title deed situation and developer mortgages are just waking up as to how important titles are.

    I seem to recall Nigel posting recently about the sale of a friends house and every Cypriot viewer asked if the vendor had deeds. They will also start to get concerned when the Banks come knocking! And they will.

  6. What we need is FAIR VALUE. And it is known perfectly well. By Land Registry. They know the price of every single property sold on the island, yet they refuse to publish it. Why? Because this would show the true picture, and it will be a scary one. What is the Cypriot attitude to scary news? Ignore it! (for the same reason you will hardly ever see in the local weather forecast temperatures over 38C. Even in the middle of August) This is psychology. I don’t say whether it is good or bad. This is just so, and we have to take it into account. Therefore even without precise figures from the CB we can make a correct prediction: if the increase in property prices is 5%, they will show 10%. If the decrease is 20%, they will show 10%. Conclusion: it is our observations that should be called official statistics, while figures of the CB is just that Ã¢â‚¬â€œ anecdotal evidence.

  7. Title deeds is a concern peculiar to the British buyers. Concern peculiar to Cypriot buyers is “brand new”. So let us not overestimate certain aspects just because thy are important to us: foreigners are a minority among the buyers, therefore we need to concentrate on Cypriot predilections if we really want to understand the market. So, lack of title deeds is NOT a major factor of the current slump.

  8. I think there is a big difference between the two Nigel.

    In Ireland it is down to economics and pricing. In Cyprus it is down to economics, pricing and title deeds or rather lack thereof. In Cyprus, no matter what the price, people are unlikely to buy, and rightly so.

    There are buyers out there. New ones who want to move to Cyprus, people who want to simply move, trade up or trade down but they will not take the chance on a property without a title due to the experience of others.

    With little activity in new builds and a vast number of uncompleted builds in simple terms buyers need to look at existing properties. There are however two markets titled and untitled properties. The latter is totally illiquid soley due to lack of title not price.

  9. One problem with assessing economic conditions, trends in property markets etc. is that those assessments are usually made by economists, analysts and other professionals whose competence in most of the cases is beyond doubt. How do we end up then with all these unexpected and “unpredictable” outcomes?

    I suspect the reason is simple: one thing is always missing in all these assessemnts: PEOPLE. Economists are obsessed with interest rates, sales, purchases, balance of payments, GDP growth etc., but you do not need all this stuff in order to make some (CORRECT!) basic predictions.

    Go to Germany and see how people work and spend money there. Then go to Greece and see how people work and spend there. And then contrast your observations with the fact that (some time ago) ineterest on German and Greek government bonds was virtually the same. Can this situation continue? NO. And you do not need analysts or economists to understand that. This is common sense. Simple and pure. Yet precisely this is missing in all the comments we read about economy, because due to the worldwide spread of complete idiocy called “Political Correctness” it is no longer possible to pronounce in public that Greek public sevants WILL NEVER WORK AS HARD AS THEIR GERMAN COUNTERPARTS DO (for example). It is absolutely irrelevant that someone in Greece finds this unpalatable. The fact remains.

    Now to Cyprus. We do not need figures from CB, valuers or economists to understand where things are heading. You simply drive from home to the office and one the way notice: 3 cars ignoring red ligts, 23 cars parked on the double continuous yellow line and a police car peacefully cruising past. And you expect to get your title at the time of purchase?? Wake up!

  10. “Oh, what a tangled web we weave, when first we try to deceive”. Cyprus deserves the mess it is in. It is the fair and inevitable result of the lies, cheating and deceit of its ruling class of bankers, property developers, lawyers and government. When I ponder this magnificent Cypriot mess, I do not know how it might ever recover, when the appropriate medicine will be summarily rejected by the Leaders of the status quo. The medicine required is massive devaluation (the Euro is showing the way already) of all prices, from houses to doctors fees, to consultants, to the tiny cups of forgettable coffee.

    Cypriots alone are responsible for their predicament. They may be too proud to change their ways, but Mr Market is already having his wicked way with them, and will continue to do so. If Cypriots are not too proud, then they should question the legitimacy of the Establishment that has led them to this point. Other countries in and around the M.East have shown the pluck to challenge the status quo. But hold on; maybe there is more time – to wait a while longer, to put off the changes that only seem necessary. Everything will turn out for the best! I think house prices will rise next year and I want to buy one nowÃ¢â‚¬Â¦ off-plan please, the people here are perfectly trustworthy. Can someone recommend a local lawyer to represent me? What a joke!

  11. And what makes the Cyprus residential property market so illiquid? Lack of title deeds due to developer mortgages that buyers knew nothing about.

    Always comes back to the same point. Solve this one and the market will improve, notwithstanding the economic climate.

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